Back to the Future

Lessons learned from Lehman Shock

By Megan Casson

The financial crisis of 2007–8, triggered by the collapse of Lehman Brothers—then the fourth-largest investment bank in the United States—sent shock waves around the globe and moved governments to institute new safeguards.

A decade later, as the fallout and hard­­­ships fade, some safeguards are being weakened. One of the most prominent women in global journalism, Gillian Tett, US managing editor of The Financial Times, spoke about this at an October 5 luncheon at Tokyo American Club. The event was hosted by the American Chamber of Commerce in Japan’s Women in Business, Alternative Investment, and Taxation Committees.

Discussing her career, the global financial system, and possible future financial crises, Tett offered insights into the lessons learned from past crises and the outlook for the global financial system.

JAPAN WARNINGSTett was sent to Japan in 1997 to write about manufacturing and industrial companies. But, on the day of her arrival, she was asked to write about finance instead. During her four-year stay, she witnessed firsthand how the bursting of the bubble economy had impacted the country’s financial system.

“As we saw the Japanese financial institu­tions topple over one by one, the series of panics and hard measures by the govern­ment to try and prop the system up never worked, because there was this constant tendency to sweep things under the carpet,” she said.

She also recounted how, in early 2007, a friend whom she knew from her time in Tokyo a decade earlier expressed his concern that stirrings in the United States looked similar to those that had occurred in 1996 Japan.

“It was indeed the beginning of a financial crisis. What actually happened in the United States, in 2007, was that—for about a whole year—the Americans did more or less exactly what the Japanese had done.”

LESSONS FORGOTTENLooking to the future, Tett shared three main concerns about the financial system, starting with sovereign debt. “Between 2007 and 2017, the proportion of debt to gross domestic project on a global basis actually rose quite sharply, by about 40 points. It’s gone up from 179 percent to about 220. Much of that is sovereign debt.”

She also discussed the world’s inability to learn from past mistakes, saying, “One of the amazing facts about the post-crisis era in a global financial system is that, after we had a crisis in 2008 caused by far too much debt, you would have thought the world would say, ‘You know what? Let’s try and cut our debt levels.’” As demonstrated by those figures, quite the reverse has happened.

REGIONAL RISKChina is also a concern. “I can see so many parallels with Japan in the 1980s—in terms of taking a bank-centered financial system, entirely controlled by the government, and directing it towards building up the industry as fast as you can.” She explained that combining this approach with a govern­­ment that is slow to liberalize can result in familiar events.

However, there are a few things the Chinese could do. “What might save China is not just the fact that they do have some big reserves, but the fact that Chinese leadership seems to be very aware of these issues,” she said. Hopefully, being aware of the potential threats will give China a chance to prevent a crisis—unlike what happened in the United States in the late 2000s when warning signs were ignored.

Overall, Tett believes that the biggest threat to the global financial system is insufficient cybersecurity. “If I had to make a bet about what would cause the next big shock, it really would be cyber risks or cyberattacks on the financial system.” She explained that the rising tensions between world powers pose great risks of cyber incidents due to the lack of protocol about how to cope with such attacks.

UNPREDICTABLEIn closing, she shared how difficult it can be to anticipate the direction of the world, despite seeing trends. “I never thought I would be dealing with an America which is not, right now, in financial crisis, but is in many ways in political turmoil, that may prove almost as damaging.”